Poor quality of disclosures in India

Prof. Jayanth R Varma has written an article in yesterday's Financial Express on the infrequency of disclosure of the balance sheets in India even though the profit and loss statement is updated every quarter. In fact he understates the problem. Not only the balance sheet, but hundreds of other disclosures are not made once in a quarter, many not even once in a year.

Before I joined SEBI, when I was a part of the Disclosure Committee of SEBI (headed by Mr. Y H Malegam), I had written a working paper at IIM, Ahmedabad which is available here. The basic point of the paper is that the quality of disclosures at the time of public raising of equity is very high (maximum at IPO), while that on a continuous basis by a company is relatively very poor. Because of this a) continuous disclosures are of poor quality - thus a shareholder buying from the secondary market faces poor information flow compared to one buying from the company. b) it takes a very long time to raise capital.

Based on the working paper, Mr. Malegam appointed a sub-committee on 'integrated disclosures' to work on the minute details of improving continuous disclosures. This was of course a herculean task as it required looking into dozens of sources from the Companies Act schedules to regulations and circulars of SEBI. After I joined SEBI, the sub-committee continued the work and came out with the final report in January this year along with exhaustive annexures which would capture disclosures on a frequent if not continuous basis.

Here is a summary from the conclusion of the Report:

"Relying on a regulatory framework based on the requirements of a different era

may be a costly error which we might already be making. We can improve

disclosure by strengthening continuous disclosures and reducing duplication for

which there is substantial cost and no benefit. If we could do that with today’s

technology and thus improve the quality of information while reducing the quantity,

information would become more readable, access to investors will be wider and an

empty formality of registration could be translated into true ‘on tap’ disclosure

available to all continuously. Data concerning business, property, management,

financial condition, and results would be available at all times and updated in a

single document whether there is an issue of capital or not. On the other hand a

much lighter version of memorandum of transactional details could be made with

each issue. Thus, making raising of capital cheaper and easier, information more

accurate and more widely available - benefiting both issuer and investor. The

intermediaries like investment bankers would have a leaner role in capital raising

but a much more substantial role on a continuous basis."

As three years of work has already been done and both the large exchanges were part of the work, implementation of the same would not take much effort given the will to implement it by SEBI.

See my main blog for the full post.